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when it comes to cryptocurrencies bitcoinNew investors are often motivated by friends to take the plunge, according to a new study.
But experts warn it could be a trap for the unwary.
“I don’t think friends talk about when they lose money,” says Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.
“Sexy sales,” added Baker, who sits on CNBC’s advisory board. “Sell up.
“But people don’t talk about downsides,” he added.
Nearly a third (31%) of new cryptocurrency investors in 2022 cite a friend’s recommendation as the main reason for a purchase, according to a recent joint survey study Published by the FINRA Investor Education Foundation and NORC, University of Chicago. A friend’s recommendation is the number one motivating factor for new cryptocurrency buyers.
That compares with 8 percent for new investors in more traditional assets like stocks and bonds.
According to the study, this discrepancy suggests that “social factors in cryptocurrency investing are not as pronounced in stock or bond investing.”
This is not to say that a recommendation from a friend is not necessarily a bad reason to buy a digital asset.
But it can be a “double-edged sword,” said Gary Mottola, director of research at FINRA’s Investor Education Foundation and co-author of the report.
On the one hand, cryptocurrencies can be an on-ramp to more traditional investments — which is usually a good outcome, Mottola said. There is some evidence that this is happening: 36% of new cryptocurrency investors said their purchases made them more interested in investing in the stock market, the study found.
However, “friend recommendations (in cryptocurrency), sources of information on social media, may not be reliable,” Mottola said.
trust but verify
fear of missing out Can be a powerful driver of investment decisions.
Bitcoin and other crypto assets are on the rise in 2021, a record year for digital assets. By November 2021, Bitcoin jumped from around $10,000 in the summer of 2020 to a peak of over $68,000.
But the tide turned quickly during the so-called “crypto winter,” when investors lost more than $2 trillion in the year after the market peaked.
Celebrities like actress Lindsay Lohan and rapper Soulja Boy have recently fined by the SEC Undisclosed endorsements for various cryptocurrencies.
“Unless they’re some financial person with legitimate knowledge, trust but verify,” Baker said of what you might hear from friends or “pseudo-experts” on social media.
One of the dangers of following a friend’s advice is that investors may not understand the risks and volatility associated with cryptocurrencies (or other investments), or how it fits into a broader, diversified portfolio, he said.
Another potential pitfall: You might get referrals from friends when the market is near its peak, at which point most of the growth potential has already been realized.
Bitcoin is currently worth about $30,000, almost double what it was in early 2023. Baker predicts that if the trend continues, he may soon get more calls about cryptocurrencies.
“If you’re doing some research (about encryption), I think it’s fine,” Baker said. “If you’re just blindly taking information without doing any research, that’s a terrible idea.”